Bailout math, BAC edition

By Felix Salmon
May 7, 2009

When the government announced stress tests on February 23, Bank of America stock closed at $3.91 a share. At that level, if the government converted $34 billion of preferred stock into common equity, it would have received 8.7 billion shares in Bank of America. There are 6.4 billion shares outstanding right now, which means the government would have ended up with a controlling 58% stake in the company.

Today, BAC is trading at $14.64 per share. At that level, the conversion of $34 billion of preferred stock would mean the creation of 2.3 billion new shares, which would give the government ownership of “only” 27% of the company — a large stake, but very much a minority stake. What luck, for all concerned, that the stress-test result, at the current share price, doesn’t risk giving the government control of the bank!


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What “luck” indeed.

Posted by Pietro | Report as abusive

Once they convert the entire $45 billion, which seems likely given the continued losses in CRE that are just beginning to surface, this will equate to more like 40% ownership, correct?

If BofA is to convert prefs, surely it would ape Citi’s humbling deal and do half in govt prefs and half in private? They have $33bn of private prefs, after all.

Posted by Murray | Report as abusive

I am not surprised that Felix is disseminating inaccurate information, but doing it in a witty manner so I guess that’s something.

Govt set the price of conversion at $6 something back in early february. Therefore it makes no sense to convert govt preferred, but to make an offer to the private preferreds. Say something like offering to exchange their current preferreds for mandatory convertible preferred with a conversion price of say $20 a share. Most of the preferred shareholders would jump at an offer like that.

Posted by bill | Report as abusive

well, obviously they dont want to

and you saw this

Posted by at | Report as abusive

see 2 posts up – if another, competitive blogger posted something so wrong Felix would be all over them (i.e dealbreaker) – wonder why he hasn’t taken this down yet and saved embarassment?

Posted by bruce fields | Report as abusive

The problem is the government in this case, they put themselves in this scenario, they should have been able to acquire majority shares by now and restructure not only BoA, but all the other bailed out, failed financial institutions. Another source of the controversy could be the stress-tests, how they are being conducted and formulated and how to interpret results.

Posted by David Dzidzikashvili | Report as abusive

How can you tell which issue of private preferred is likely to be converted? I own BMLPRL. Is it worth hanging onto?